The main threats for Bitcoin in 2017. Are they exaggerated?

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Last week the rate of Bitcoin crypto currency week recorded a 20% drop. However, over the past four days, the appreciation reached 38%. Bitcoin exceeded the mark of $ 2500 and continued to increase to $ 2700. The approach of August 1 causes such high volatility. That day the crypto currency can split into two parts.

For several years Bitcoin community cannot decide how to optimize the network that provides the operation of crypto currency. Bitcoin operation is built on a record of transaction data in a chain of blocks, each of which stores data about the transactions and the signatures that confirm them. Each new network block can contain no more than 1 MB of information.

Such restriction makes it possible to guarantee the security of transactions. At least, it was considered as such at the time of the crypto currency creation. One megabyte was enough to record information. Also, such solution made it possible to make the size of all blocks equal. The growing popularity of Bitcoin led to an increase in the network load. Reddit has already calculated that almost all the blocks from the end of last year are full. In addition, in mid-2016 the number of transactions in the blocks grew by 50% in annual terms.

Due to the increase in the number of transactions, users need to wait long for the transaction to pass. Due to the increase in waiting time, commissions for the transaction began to grow. Users are willing to pay more for speed.

Scaling of Bitcoin

The community proposed to scale the blocks, but users and miners offer different solutions. At the same time, there is still no option, which everyone could agree to. Disputes about the method of scaling have already been called “civil war”.

Miners are in favor of increasing the block size to 2 MB. This will allow them to conduct more transactions. They also have an interest in reducing the Bitcoin rate. New blocks won’t be as profitable as now. That means it will be easier for the miners to receive funds from commissions for transactions.

Miners income consists of two components: commissions for transactions and fees for the formation of new blocks. The reward for new blocks decreases every year. From 2009 to 2012, it was 50 Bitcoins. Now it is 12.5. But the net income still grew – because of the Bitcoin’s growth rate. At the same time, the process of mining bitcoins is becoming increasingly competitive and energy-intensive.

Users are afraid that changing the basic rules can lead to system instability. So, Bitcoin Core Bitcoin developers suggested to take out some information out of the block instead of increasing its size. This can be done by separating the electronic signature that confirms the transactions. The name of this upgrade is Segregated Witness (SegWit). It does not affect the security of the system, increasing the network bandwidth. At the same time, miners don’t like SegWit. Namely, Jihan Wu, the founder of Antpool —the world’s largest mining pool expressed his concerns.

Risks

We remind you, that in May the largest miners signed an agreement. That agreement provides the transition to SegWit if there is support by the majority. At the same time, In November, the miners intend to increase the size of the blocks to 2 MB. Miners have already voted for SegWit, which accounts for 80% of the network capacity. However, in theory, those who participated in the vote can change their decision. Because of this, there is a risk that not all miners will switch to Segregated Witness. If part of the miners refuses this decision, then in August the Bitcoin will split into two chains.

The split of Bitcoin may probably occur in November because of the transition to blocks of 2 MB. At the same time, users and Bitcoin Core are unlikely to agree with the increase in blocks. 40% of Bitcoin users on Twitter go against the blocks increase.

Since the increase of the blocks does not suit some users, some can move to new blocks. And some will still use the old ones. It may also happen with the miners: some will form blocks of 2 MB in size, and the rest – of 1 MB. Thus, two separate branches of Bitcoin will gradually form. The split of one chain into two is “hard fork”.

The division into two crypto currencies will have an impact on the Exchange Rates. For example, after the split of Ethereum into two currencies, the price of Ethereum exceeds $ 200, and Ethereum Classic stays about $ 15.

Some of the crypto currency exchanges have already stopped making transfers and withdrawing funds. In addition, users are advised to stop transactions at least 12 hours before “hard fork”. They also should not trust the transfers during the event.

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